In my regular column for The National in Scotland, published yesterday, I put forward a hypothesis about the government's attitude towards inflation.
Much of the argument in the article about the current state of inflation and why I think it is temporary will be familiar to readers here, and so I will not repeat it. However, I did add a twist, which is an idea that I have been musing upon for a few days. This is that the government is doing nothing to really ease inflation. Worse, it may actually be stoking inflation in pursuit of its own policy agenda.
I am aware that this might sound a bit like a conspiracy theory. It may also credit the government with more ability than it is reasonable to suggest it enjoys, but there are a number of reasons why I think that this argument may be appropriate.
As I noted in The National when discussing current causes of inflation:
The increase in energy prices is a matter ultimately under the control of the government because they set the price caps. So too are train prices government controlled, as are increases in local taxation. Come to that, so too are interest rates government controlled, and as a consequence the cost of mortgages is heavily influenced by the government, and that in turn has a significant impact on rents payable. Add all this influence up and the government appears to be doing little or nothing to constrain these price increases that it could influence. Even where it is suggesting that it might provide help, for example with energy costs, the measures that it will take appear designed to sustain high reported levels of inflation when other options it could have chosen would have cut the absolute price we have to pay, and so reduced the rate of inflation, which would have reduced the pressure on interest rates.
My point is that there are significant parts of inflation that can be heavily influenced by government policy. For example, I have no doubt that if the government so chose it could have limited energy price inflation for domestic households by reducing the increase in the energy price cap. It could then have provided loans direct to energy companies to spread energy costs over time instead of using the complicated mechanisms it is chosen to utilise which will reflect the full energy price increase in current inflation calculations, as far as I can see.
The government could also, if it had been so inclined, have reduced rates of duty on fuel prices at present because its VAT take from the same source is rising. It could quite easily balance these two taxes to produce an overall tax neutral situation for itself. This could have mitigated inflation.
It could also have changed the rules with regard to rail fare price increases now that the entire railway network is under its control.
Given that local authority taxation is included in the calculation of inflation indices and overall levels of local authority taxation in the UK are set to rise by about six per cent, prior to energy discounts, it would also have been very easy for the government to have used a very limited amount of quantitative easing to mitigate such tax increases and thereby reduce inflationary pressure.
In addition, and quite importantly, the government could have also made it very clear to the Bank of England that it did not think that interest rate rises were appropriate at present when there is absolutely no causal link between current inflationary pressures and interest rates, and downward pressure on demand is already high from externally imposed price increases meaning that demand reduction should not be on the Bank of England‘s agenda.
I am not suggesting for a moment that these measures would have removed all the short-term inflationary pressure that was created during the course of the autumn, which is now working through the economy. Some of those pressures are real, and if there was to be war in Ukraine then they would increase. But if, as the government says, inflation is a matter of priority to it, what I am suggesting is that there are very many more ways in which the government could in the current situation mitigate that inflationary pressure than by simply relying upon the imposition of a further form of inflationary price rise, which is exactly what interest rate increases represent. Quite specifically, as I note above, regulatory and fiscal changes could have a much more direct and relevant impact.
So, why wouldn't the government want to reduce inflationary pressure? As I noted in the National:
I am left with the uncomfortable impression that the government is doing very little to really control inflation and might even want it. That's because it wants to increase interest rates, which benefits the City of London, and the well off. Vitally, it also wants to use high interest rates as an excuse to impose austerity, which still seems to be at the heart of the Conservative project. And, of course, the government wants to push down real wage rates, because that favours the employers it serves.
I am not necessarily suggesting that the existence of evidence necessarily proves a conspiracy. That can, just as easily, indicate that there has been a cock up. However, whilst it is possible to think that this government is entirely incompetent, there are clear signs to the contrary when it is acting in pursuit of its wholly inappropriate social and economic goals. The promotion of inflation might very much suit those goals at present. The possibility that there is a conspiracy has to be taken seriously.
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The argument presumes that the government is capable of conspiracy.
That’s one which should not be taken seriously.
Also missing from the argument is a comparison to other territories which printed the money. Apart from France (nuclear) and Switzerland (hydro + nuclear), all the large economies of the European mainland have inflation around our level. And we’ve left the EU so it would be a heck of an achievement to conspire with them on this.
Shemirani I’m afraid.
You seem to have completely misread the argument
I suggest there is short term inflation and then say the government wants to perpetuate it
You have created a straw man to dismiss this
Try again
There is a widely known philosophy that has never regarded the state as either benign or neutral, but a tool of whatever elite happens to control the levers of power in the society under discussion. Such an analysis is hardly controversial in the cases of, say, Burma, China or Russia, or a multitude of other countries across the globe. We have not seen Britain in the same light, simply because we have believed we were protected by our democracy from the unbridled abuse of state power. Up to a point, that was true and remains true, but the reality is that, in Britain in particular, with its unwritten constitution, democracy is paper thin and legislation to intrude on individual freedoms largely incapable of challenge on constitutional grounds. Hence, the flurry of such legislation recently over police powers and the right to protest. Abuse of state power is normal n Britain and that always becomes obvious in times of crisis or with right wing governments.
Perhaps, we have hitherto regarded management of the economy in a different light, but nothing imposes greater restraints on freedoms than grinding poverty, which is always enhanced by inflation, particularly that engineered like we are currently enduring, as a series of de facto taxes on the most vulnerable. It’s not a conspiracy. It is business as usual. Historically, such a discussion has been limited in Britain (not the rest of Europe) to non mainstream political groups widely dismissed as irrelevant loonies. There are grounds , and perhaps conditions to change that.
Paul Henry.
Just to add to your point.
I read a long time a got that the leaders of the USSR saw democracy in the West as a sham.
That, they understood the nature of power.
They knew that there was an elite in the West, (like there was in the USSR) that ran the show.
Democracy and elections were a gimmick.
Real power doesn’t reside within political parties or the electorate.
Conspiracy Theory????
But what if energy price increases are permanent due to a rising Energy Return on Investment (EROI)?
Inflation will continue to ripple through the rest of the economy because (cheap) energy is the bedrock of the economy.
Sorry declining EROI, not rising
You do know one off price adjustments last for twelve months in the inflation index, don’t you?
Richard.
Are you saying that the price of oil and gas is going to drop again?
Give me a reason why it will not when it is historically volatile and is rarely at current levels?
Richard.
I’m not looking to pick a fight but I have a question that the MSM doesn’t seem to be answering and I genuinely don’t know the answer to.
Why is there a spike in energy prices? What is cause?
I’m guessing that the increase is because demand is outstripping supply?
But why can’t supply meet demand?
The global economy isn’t back to pre COVID levels of activity and yet, I don’t remember there being any talk of a “cost of living crisis” in 2019?
Oil even went negative for a short while because there wasn’t enough storage for the oil due to a drop in demand/use.
Are the producers restricting production to push up the price?
Is it geopolitical?
We know that fascism thrives in chaos.
We know that the financial sector also benefits because it will either hoover up cheap assets or get bailed out.
Perpetual war for perpetual peace – as Gore Vidal wrote.
In other words they will manufacture a fight against inflation or/and the national debt to justify austerity and further privatisations.
They are creating what they are telling us they are fighting like all good fascists do. Hence it being ‘perpetual war for perpetual peace’.
I suppose you could call it a ‘conspiracy’……or you could just call it ‘Conservative policy’.
Vinnie’s general point on declining EROI still holds though. Although it would be quite hard to disentangle how this factor in isolation is affecting prices currently, given the vicissitudes at play. I think we are on an upwards trajectory with energy prices as we are too reliant on fossil fuels and the costs of transition to renewables.
The government has completely failed to promote a renewable energy transition and we are reaping what has been sown by their inaction. Having worked in solar I saw the feed in tariff cut until it was not an incentive. This reduced demand and rather than slowly phase in solar energy, the industry was effectively hobbled. We might question whether there was some lobbying on behalf of fossil fuel and energy companies here. Imagine decentralised power generation beyond their control…
Price inflation is an inevitable result of the situation we are in, fossil fuel reliance, falling EROI, and the cost of transition to renewables. It seems increasing bills will be a feature rather than an anomaly.
Rickster
This article sums up the arguments about a declining EROI very well.
https://dothemath.ucsd.edu/2011/10/the-energy-trap/
This is not really exactly pertinent to what you have written…. but it is pertinent to the great inflation debate….
Interesting article by Armstrong and Wu in the FT about inflation – it tries to move the debate on from “transitory” or “spiralling”.
In conclusion, it says inflation might remain subject to spurts (as we are seeing now) but that this is helping drive re-allocation of resources and that CBs should accept it as the alternative of much tighter policy which would be worse.
So, (for example) higher oil/gas prices drive a reallocation towards green energy and low energy intensive activity which is a good thing. Cooling the whole economy with higher rates will curtail this investment and be generally more destructive than just letting things be.
It’s the first piece I have read in the debate that asks “and what is so bad about a bit of inflation?”
I thank you for this.
It is as clear a pamphlet that speaks truth to power as I have read.
“ existence of evidence necessarily proves a conspiracy. ”
It does.